UPDATE 1-EU to reform sales tax, prepares changes to rates

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* Move aimed at tackling fraud and dissuade tax schemes

* VAT to be permanently based on country of destination (Writes through.)

By Francesco Guarascio

STRASBOURG, Oct 3 (Reuters) - The European Commission will propose on Wednesday changes to the way sales taxes are levied in the European Union, in an effort to close tax loopholes and eliminate fraud, a draft document said.

The new measures on value-added tax would mostly tackle frauds in which companies pocket VAT revenues from cross-border sales instead of paying them to the local government.

The move would also end the practice of companies avoiding VAT by basing themselves in countries with low VAT rates. They will now, as a general rule, have to pay the VAT charged by the country where their products are sold.

That principle has already been established by temporary regulations. The proposed reform would make that permanent.

“This definitive VAT system will be based on the principle of taxation in the member state of destination,” the document, seen by Reuters, said.

The proposed changes are expected to permanently end tax advantages for supplier companies that serve the EU market from a low-tax country, like Amazon, which is based in Luxembourg.

The EU executive said the changes would reduce the need for a harmonised VAT rate policy. By November it will make new proposals to reform VAT rates, giving states more power to set them.

The move is also aimed at reducing scams that deprive EU states of large amounts of VAT revenues. Often such fraud involves companies collecting tax when a product is sold but not paying it to the government of its home country. Collecting the tax in the country where a product is sold would eliminate that fraud. (Reporting by Francesco Guarascio @fraguarascio; Editing by Larry King)